In the last 10 days or so we have had both Mumbai and Delhi doing their bit towards pushing growth. The central bank reduced the administered rates and the government has announced a modest fiscal package.
As for the first, one would have preferred a cut in reserve requirements to help spur bank lending. The relatively small scale of the government spending package is also a reflection of our fiscal weakness.
It says something about our priorities of spending that, even after four years of 9 per cent per annum real GDP growth, and a very sharp increase in revenues, the fiscal situation has actually worsened, particularly after the supplementary demands for Rs 240,000 crore (Rs 2,400 billion) were passed by Parliament. The key to fiscal health remains curtailment of subsidies to the better off -- but this is obviously a non-starter.
This apart, there were calls for a sharp increase in infrastructure spending to push growth. However, it does not seem that lack of resources is holding up infrastructure investments.
To quote a couple of recent instances, no new projects have been awarded under the National Highway Development Program between July and December, and two-thirds of the projects awarded have not achieved financial closure (The Indian Express, December 5). A few weeks back, it was also reported that the World Bank has threatened to withdraw its line of credit for highway development because of lack of progress.
Overall, it does seem as if it is not money but less-than-clear policies, multiple authorities, non-transparent regulatory regimes, stifling procedural impediments, overlapping agencies and objectives, etc that are holding up the investments.
In fact, it seems to me that inefficient governance may well prove to be the biggest hurdle to growth than any other single factor. Media reports after the terrorist attack in Mumbai have graphically conveyed the utter confusion and lack of coordination between different agencies of the government, even on so important and high priority an issue as terrorism.
On economic issues, which of course can never attract as much media attention and headlines as terrorist attacks, the general standard of governance is even poorer. Add to that the political attractions of generally taking a pro-agriculture (read "anti-industry") posture, most successfully demonstrated by Mamata Banerjee in West Bengal. But she is by no means alone: it was reported by Mint on December 3 that the Congress was hoping to regain power in Rajasthan riding on the land acquisition issue.
I am sure our political masters understand that while an acre of land would barely give sustenance to one family if used for agriculture, it could create several hundred jobs in manufacturing or services; that rural standards of living will not improve unless a vast number of people move away from agro-based to other employment -- and yet nobody wants to take a stand on the issue.
While the broader issues will surely start affecting growth prospects in the medium term, the outlook in the near term also does not look very promising. Based on its analysis of leading economic indicators, ICRIER has forecast growth of just 6 per cent in the current year, going down to 4 per cent in the next.
These numbers are much lower than the official forecasts but look more realistic. So many sectors -- from vehicles, to construction, to tourism, to textiles -- are experiencing slowdown.
Exports fell 12 per cent in October and the prospects for the rest of the year, as also probably the next, do not look very promising. (Export growth amounted to as much as 42 per cent of the GDP growth in the first half of the current fiscal year -- to be sure, this number would need to come down to the extent of imports used for exports, but I do not have data to estimate this.)
Overall, ICRIER may turn out to be nearer the mark than others. In that case, the prospects for corporate profitability, the equity market and capital flows would need to be reworked.
Some regulatory issues
The willingness to allow Indian companies to buy back FCCBs at a discount is to be welcomed. The discounts are attractive, but the problem is how many companies have the resources to effect the buy-back. Many of these FCCBs are maturing in the next 2-3 years and, to my mind, they present an attractive investment opportunity for Indian mutual funds who can invest in the secondary markets abroad.
One area where the current crisis in the global financial markets has focused attention on is the need for clearing and settlement of credit default swaps.
The volumes have gone up rapidly and the back offices have not been able to cope up, leading to regulatory worries about what skeletons may be hidden in the CDS cupboard. A parallel in India is the fast growth of the interest rate swap market. The outstandings are huge and the initiation of guaranteed settlements is needed.
Tailpiece: After having botched up the management of credit exposures on speculative currency derivatives they had sold, banks now seem to have started insisting on cash margin even on good old forward contracts entered into as genuine hedges.
